Yesterday’s positive outcomes from the bond auctions of France and Spain have given the beleaguered euro a welcome respite from its recent woes, but significant headwinds still remain.

Not least of these headwinds is Greece as the PSI talks continue to rumble on with optimism of a deal beginning to fade as the weekend approaches. In any case even if a deal is reached it won’t even begin to solve Greece’s problems, of a shrinking economy and a growing debt burden.

Concerns about growth in Europe remain a worry after the IMF once again cut its European forecasts for 2012, with particular concern centred on Italy and Spain. Estimates are for a contraction of 2.2% and 1.7% respectively while Europe as a whole is expected to shrink by 0.5%, down significantly from September’s 1.1% rise.

The troika of the EU/IMF and ECB return to Athens today to discuss the terms of a second bailout, fresh from their visit to Ireland yesterday where the Irish press pack gave them a rather rough ride, despite them giving Ireland a favourable report after meeting and exceeding its austerity targets.

In the UK the pound has had a rather poor week, slipping sharply against a basket of currencies on the back of some rather mixed economic data. Expectations about the likelihood of further asset purchases being announced in the coming weeks from the Bank of England have prompted some sterling selling, after the pounds recent gains.

Later this morning we should get a glimpse of how the British consumer fared in the lead up to Christmas with the release of the latest retail sales numbers for December. The hope is that the heavy discounting seen in the lead-up to Christmas will have prompted the loosening of the purse strings at the end of what was a tough 2011.

Expectations are for a rise of 0.7%, up from November’s disappointing 0.4% decline, however given some of the recent results from the retail sector in the past two weeks, one could be forgiven for thinking that a 0.7% rise may well be on the optimistic side.

There is no question that given the UK economy’s reliance on the services sector that a good December retail sales number will calm nerves ahead of next weeks Q4 GDP number where there is some concern that we could well see a contraction.

In Europe expectations of lower rates are also on the agenda and this morning’s German PPI for December is expected to show a drop from 5.2% to 4.6%, year on year. In the US the latest existing home sales data for December is expected to show a rise of 5.2%, up from November’s 4% rise.

EURUSD – we got the break above 1.2880, and we now look to be headed towards the 1.3000 level. It now seems likely that if we are able to get through the 1.3000 level and even sharper squeeze towards 1.3250 could be on the cards. The key support remains near to the key 1.2600 level that represents the 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. This support level also coincides with the August 2010 lows at 1.2590. A concerted break below this level would target 1.2480, the July 2010 lows and then on to 1.2000. The key barrier on the upside remains the resistance around the 1.2870/80 or last weeks highs.

GBPUSD – the pound continues its rather laboured push higher as it looks to close back in on the 1.5570 area, but we need to stay above the 1.5360 area. The 1.5500 area could well be a touch nut to crack in the meantime. While below the 55 day MA at 1.5740 pressure remains on the downside. The 1.5270 support area remains a key level and obstacle to further sterling declines towards the 1.5190 level, which remains a key support area given that it is 61.8% retracement of the 1.4230/1.6745 up move. There is also support at 1.5125, the July 2010 lows, a break of which targets 1.4980.

EURGBP – the euro continues to make gains above the 0.8310 level but should remain capped anywhere near last weeks highs towards the 0.8370/80 area. There is also trend line resistance from the October highs at the same level. Any break above here targets the 55 day MA at 0.8455. This should cap any gains for a move back towards the 0.8220 lows from last week, and target the September 2010 lows at 0.8200/05 which remain the key obstacle to further declines towards the 2010 lows at 0.8065.

USDJPY – the US dollar continues to find support above the 76.50 area trading steadily above this level. The resistance remains at the confluence of the 55 day MA at 77.55 and trend line resistance at 77.70 from the 2007 highs at 124.15. The key support remains around the November 2011 lows at 76.50 which prompted last week’s pullback. Only a move and close below 76.50 opens up the all-time lows at 75.30.